On January 31 2022, the UAE Ministry of Finance (MOF) announced the introduction of a corporate tax (CT) regime by publishing FAQ’s and later at the end of April 2022, released the Public Consultation Document (PDC) seeking inputs, on all possible aspects covering technical and other aspects, from the business community and other interested parties before rolling out UAE Government intention and expectation from CT.
The FAQ’s published covered high level details on applicability (UAE businesses and commercial activities), effective date (businesses with the financial year starting on June 1 2023), CT rates (0 per cent, 9 per cent and 15 per cent*), exempt income (individual salary and other income earned in their personal capacity and dividends and capital gains earned by a UAE business subject to conditions), free zone business taxability, tax grouping, transfer pricing rules (on business transaction with foreign and domestic related parties) and the glimpse of administration.
However, the PDC has thrown light on the important aspects including “taxable person” and “basis of taxation” that may be implemented with the introducing of final regulation to cover the taxability on the income of a natural person (where income generated from business or commercial activity in UAE would be taxed but need clarification on the requirements of trade licence or permits as condition to consider a part of total income for tax purpose) and, legal person covers, the entities incorporated/established under the UAE law would be subject to CT and for the foreign legal entities, the concept of permanent establishment (PE) along with the sourced-based income rule would play an important role to understand the applicable tax on non-resident (NR) income. PE of foreign entity is determined through two tests (i) fixed place of business test, where in place of management, branch, workshop, employee’s home office are considered as PE and shall be subject to CT, (ii) dependent agent test, to check whether person can concludes the contract on behalf of foreign entity and accordingly, agency agreements terms needs to be revisited to ensure that person/agent should undertake the business as independent agent (legally and economically).
Legal person also covers general partnership entities and unincorporated JV, which may be taxed in the hand of partners as accepted internationally whereas in a limited liability partnership, a partnership limited by shares may be taxed as a UAE incorporated entity. The remuneration to owners, partners and shareholders and persons connected to them would be allowed subject to principle of arm’s length pricing rules of OECD transfer pricing guidelines.
Tax planning will go a long way in saving on taxes for businesses.
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